BWLD BECOMING A LESS ATTRACTIVE ON SHORT SIDE

Buffalo Wild Wings is screening less conclusively as a short as chicken wing prices have declined dramatically over the last few weeks. We believe that the “conversation” around BWLD’s main input cost has changed significantly and this has important implications for our short thesis.

Hedgeye’s macroeconomic outlook has differed from consensus of late but market prices are vindicating the stance that a stronger dollar, and the lower commodity prices that tend to accompany that, is boosting the purchasing power of the American Consumer.

From Buffalo Wild Wing’s perspective, the implications of this are two-fold:

Chicken wing prices should come down as a derivative effect of a stronger dollar, lower corn prices

We believe that issues at the company level preclude us gaining sufficient conviction on the top line to suggest buying BWLD, but some facts pertaining to our short thesis have changed.

Traffic Still a Potential Problem

We retain a healthy level of skepticism that Buffalo Wild Wings will ultimately meet consensus expectations. While the consumer, overall, seems to be holding up well despite the payroll tax increase, casual dining is not a point of strength. We doubt there are any restaurant companies, particularly within casual dining, that have the power to raise prices 6% year-over-year and not see a drop off in traffic growth. Management has implied that tests have “gone well” with the changes in how portions are sized (by weight versus number of wings) but we believe that bulls may be underestimating the sensitivity of traffic to price increases.

Wing Prices Coming Down?

Over the last year we have heard management’s tone on commodity costs change drastically. This thorn in the company’s side may finally be going away as prices seem to be steadily declining. Management is aiming to bring cost of sales down to 30%, from 32% in 4Q12. This is largely dependent on how comps trend but wing prices coming down should make this goal easier to achieve.

At this point, it is difficult to know where wing prices will trend, but if prices were to continue to trend lower, it could have a dual impact of improving sentiment on the stock and supporting EPS expectations.

Call with questions.

Howard Penney

Managing Director

Rory Green

Senior Analyst

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03/04/13 01:33 PM EST

BYD 4Q REPORT CARD

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance

OVERALL

GOODAND BAD: Q4 was a big miss from consensus although relative to our estimates Borgata was the only real negative standout. Guidance was also weak. However, BYD made a big move in selling Echelon: improves the balance sheet, removes the big overhang of a restart of that expensive project, and eliminates $16m in ongoing costs

PREVIOUSLY: "We expect wholly-owned EBITDA after the deduction for corporate expense to be in the range of $70 million to $75 million."

LV LOCALS TRENDS

SLIGHTLY BETTER: Promotional environment has stablized. BYD saw an improvement in trends starting in December and it has continued into 1Q. Customer count is up; spend per visitor is down. The higher end of database continue to do well.

PREVIOUSLY: "I wouldn't say that promotions have abated. I think they're at very much kind of the same state they were in through the summer. What we have seen is spend per visitor in the Las Vegas Locals segment flatten out."

MIDWEST AND SOUTH REGION

WORSE: Visitiation and spend per visit were lower in the casual gamer segment. The market remains very competitive.

PREVIOUSLY: "Our Midwest and South region...is currently the healthiest region of the domestic gaming industry and the most robust part of our business."

ATLANTIC CITY

WORSE: Sandy really hit AC hard with EBITDA falling 63% in 4Q. Guidance was also well below the Street for Q1.

PREVIOUSLY:

"Atlantic City.... the... environment remains competitive. Weakness was concentrated in our table games business, where both volume and hold fell year-over-year. This accounted for almost the entire EBITDA shortfall. Still, there were encouraging signs as our slot and non-gaming business showed growth. Borgata remains the undisputed market leader and we expect it will be Atlantic City's premier destination resort for years to come."

"Revel spent a lot of marketing dollars, they were very aggressive in buying business, in trying to gain trial and gain some traction. We increased our promotional dollars slightly. If you look at some of our slot promotional credits, they're up slightly year-over-year, but not substantially, and not compared to what the rest of the market is doing."

PREVIOUSLY: "As expected, we saw growth resume in our Downtown business segment in the third quarter and we anticipate this positive trend will continue in the fourth."

LV LOCALS: PENNY DENOMINATION GAMES

SAME: Introduced 1,000 new penny slot games in 4Q

PREVIOUSLY: "The Las Vegas Locals business remains extremely competitive...we're continuing our efforts to grow business from casual players. Penny denomination games are popular with these guests and are one of the few segments of the Locals market to show growth in recent months. So we've recently taken steps to ensure we are well positioned in this area and are nearing completion of the rollout of some 1,500 new penny themes across our Southern Nevada properties. Starting today we have begun to aggressively promote these new games. While we believe this initiative will be attractive to slot players, video poker will remain an essential part of our business, especially among our core players. We will continue to offer our guests what we believe is the most competitive video poker product in Las Vegas."

LOUISIANA/MISSISSIPPI

WORSE: BYD took a impairment writedown of $17.5MM on its Shreveport facility. Their 'best' property, Delta Downs grew 2% in state-reported gaming revenues in 4Q.

PREVIOUSLY: "We know that in certain markets like Tunica, Mississippi and Shreveport, Louisiana, there is a significant amount of competition both within the specific geographic market as well as within neighboring states. But I've got to tell you, I feel awfully good as to where we perform in those markets relative to our competitors that post those results. And you can see it in the revenue numbers that are published especially in Louisiana as it relates to Sam's Town Shreveport."

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03/04/13 01:20 PM EST

A Look Back at the Month in Consumer Staples

This note was originally published March 03, 2013 at 13:14 in Consumer Staples

February saw 4/7 sectors in our universe outperform the broader market (non-alcoholic beverages just underperformed the S&P 500 during the month). Tobacco lagged on regulatory concerns and the protein sector suffered when TSN suggested that trends in the current quarter were weaker than originally anticipated.

This month we added something new - we took a look at the sector’s performance by P/E quartile – unsurprisingly, the 3rd quartile (P/E ratios between 16-20.7xs) had the strongest monthly performance (HNZ was in this quartile). The HNZ transaction drove multiples broadly higher in large cap staples name, several of which traded in the same P/E range – CL, CLX, PEP. MDLZ was the weakest performer during the month and the only negative performance within that P/E quartile.

Similarly, within the 2nd P/E quartile (P/E ratios between 13.3 and 16.0x), HNZ appeared to have been the primary driver of monthly performance – CPB was the best performer in that quartile (+12.1%). The quartile’s performance also benefitted from KMB (+5.3%) and GIS (+10.3%).

The 1st P/E quartile (P/E ratios less than 13.3xs) was all about STZ (+36.7%) – the quartile would have been up 1.7% but for STZ. A second of our preferred names, (STZ, at the time, being the first) ADM, was a significant contributor to the quartile’s performance, +12.4% on the month.

Higher multiple names in the sector had a good month was well, with SAM (+10.8%) and BNNY (+17.0%) the best performers. Multiples expanded across all quartiles as prices continued to move higher and estimates for 2013 were lower to unchanged coming out of Q4 earnings season for most sectors (protein being the notable exception).

Consistent with a broad-based rally in the consumer staples sector, there hasn't been a significant divergence between high and low beta names. If anything, lower beta names have outperformed in the wake of the HNZ acquisition, likely setting the stage for some mean reversion in lower beta names as the takeout speculation wanes.

This is a familiar chart for those of you who have been following our work - it is also the chart that keeps us broadly cautious across the sector.

The anomalous relationship between the XLP and the 10 year that has existed since 2009 persists...

...despite the fact that the yield of the XLP has become marginally less attractive (combination of the yield on the 10 year creeping up and the price performance of the XLP).

Some clients have suggested to us that the move up in the group post-HNZ has been short-covering - the data doesn't appear to bear that out.

Finally, our "XLP vs. Economic Surprise" chart suggests that continued strength in the economic surprise index could signal a pause for the staples sector.

Where does that leave us?

We are going to focus on three charts - overall sector valuation, "beta chase" and economic surprise. These suggest to us that we could see a pause in the staples sector as sentiment surrounding the broader economy improves, valuation becomes more relevant and takeover speculation recedes. We would look for relative underperformance in the lower quality, lower beta names that have seen a move up in the wake of HNZ (TAP, GIS, CPB). Our most/least preferred list remains relatively unchanged:

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BYD 4Q CONF CALL NOTES

Didn't think we'd ever see it but BYD creates value by selling Echelon which overshadows still difficult fundamentals

"Our highest priority is strengthening our balance sheet. The sale of the Echelon site is another important step in the ongoing effort to improve our long-term financial position. While we remain committed to the Las Vegas market, we determined that developing a large-scale project on the Las Vegas Strip was not consistent with our current strategy. We were also encouraged to see sequential improvement throughout the quarter in our Las Vegas Locals business, as our initiatives in this market began to pay off. We remain focused on improving our core business, successfully integrating the Peninsula assets, and finding new ways to drive revenue and EBITDA growth throughout the business."

- Keith Smith, President and Chief Executive Officer of Boyd Gaming.

CONF CALL NOTES

Echelon transaction: was completed this morning and funds have been received ($157MM); will use proceeds to repay debt; the sale will remove $16MM in annual costs associated with this site

Average interest cost on Borgata debt: $400MM at 9.5%; $400MM at 9.75%

Southern Lousisiana: strongest consumer market in the country based on strong gas/oil markets in Texas

Borgata property tax appeal: going to trial in late March

Other AC property tax appeals: have already settled with the city and received substantial tax credits

Capital allocation: will use FCF in maintenance capital and debt repayments; acquisitions will only be in the future (greenfield will be the farthest on the list)

HIGHLIGHTS FROM RELEASE

Echelon transaction: A portion of the proceeds will be paid to a third party to fulfill the Company's obligations to LVE Energy Partners, LLC. Following this payment and other closing costs, Boyd Gaming expects to receive approximately $157 million in net proceeds from the transaction.

4Q Adjusted EBITDA was $100.9 million, compared to $114.3 million in the year-ago quarter.

4Q Wholly-owned Adjusted EBITDA was $86.8 million, an increase of 13.7% from the fourth quarter of 2011.

Significant items excluded from Adjusted Earnings in the 4Q 2012 include the $993.9 million impairment charge associated with the Echelon site; $39.4 million of impairment charges associated with the Company's excess land holdings in North Las Vegas and Pennsylvania; and a $17.5 million impairment charge associated with the Company's gaming license in Shreveport, La.

LV Locals: Business levels strengthened at our Locals properties toward the end of the quarter. This was primarily attributable to the introduction of an expanded offering of low-denomination slot product throughout the market, and related marketing programs

Downtown: Due to previously announced reductions in BYD's weekly flight schedule, revenues declined at their Hawaiian charter service. EBITDA at our Downtown operations was flat YoY before several one-time charges.

Midwest and South: Regional operations were impacted by softness in visitation among casual players.

Peninsula: From November 20 to December 31, 2012, the five Peninsula Gaming properties contributed net revenues of $56.9 million, and Adjusted EBITDA of $21.2 million. The segment reported substantial growth from the prior year when Peninsula was a standalone company, due to a full quarter of contributions from the Kansas Star Casino, which commenced operations on December 20, 2011.

Borgata: Adjusted EBITDA was $14.0 million, down from the $37.9 million reported in the fourth quarter of 2011. Results were impacted by the effects of Superstorm Sandy, including the closure of the property for five days.

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03/04/13 11:29 AM EST

CHINA PUKES

Takeaway:For the time being, China’s economic fundamentals and catalyst calendar support buying the dip in Chinese equities.

SUMMARY CONCLUSIONS:

To some extent, today’s “puke” instructs us that our initial interpretation of the tightening measures was not bearish enough. For the time being, however, China’s economic fundamentals and catalyst calendar support buying the dip in Chinese equities. For instance, the 12th National People’s Congress commences tomorrow and we expect to see a fair amount of positive headlines in the way of meaningful economic reforms.

If the People’s Congress goes as expected from a headline perspective and the Shanghai Composite holds TREND support (2,208), today’s aggressive price declines have presented a great buying opportunity in Chinese shares.

Conversely, if China snaps its TREND line on the back of disappointing policy-related headlines and further consternation surrounding the pending health of the country’s property market, we’ll be quick to abandon our bullish bias with the intent of once again digging into China from a short-seller’s perspective – something we have a good track record in doing (refer to our 1Q10 Macro Theme: Chinese Ox In A Box, where we were out front calling for similar policy-induced economic weakness that ultimately went on to characterize the last ~3yrs of the Chinese economy).

It appears the full impact of Friday’s macroprudential tightening in the property market wasn’t fully digested by market participants until today. To bring you up to speed, we detail the measures and their likely impact(s) in the following note: “THE BAD NEWS IS OUT OF THE WAY IN CHINA” (3/1).

In short, while we think this latest round of tightening measures is definitely impactful, they are not nearly as negative as we initially feared. The heightened concerns mostly stem from the new 20% capital gains tax on existing home sales; prior to Friday’s announcement, existing home transactions were taxed at a rate of 1-2% of the sale price.

To some extent, today’s “puke” instructs us that our initial interpretation of the tightening measures was not bearish enough. That said, however, rather than react to headline-grabbing 1D % change moves, we turn to our quantitative factoring for true guidance.

On this metric, the Shanghai Composite is still healthily bullish from an intermediate-term TREND perspective and continues to support our bullish intermediate-term fundamental bias on Chinese equities. If, however, the now-confirmed immediate-term TRADE breakdown is but a leading indicator for further breakdowns, then we’d happily abandon our bullish bias upon confirmation of that signal.

For the time being, however, China’s economic fundamentals and catalyst calendar support buying the dip in Chinese equities. For instance, the 12th National People’s Congress commences tomorrow and we expect to see a fair amount of positive headlines in the way of meaningful economic reforms.

Additionally, China’s MAR growth figures are almost certain to improve sequentially from the Lunar New Year-impacted FEB figures – such as the FEB NFLP Services PMI, which ticked down to 54.5 from 56.2 (dragged down in part by a -1.9 ppt. drop in the New Orders subcomponent to four-month low of 51.8).

All told, this week will be a critical week for investors in Chinese equities. If the People’s Congress goes as expected from a headline perspective and the Shanghai Composite holds TREND support (2,208), today’s aggressive price declines have presented a great buying opportunity in Chinese shares.

Conversely, if China snaps its TREND line on the back of disappointing policy-related headlines and further consternation surrounding the pending health of the country’s property market, we’ll be quick to abandon our bullish bias with the intent of once again digging into China from a short-seller’s perspective – something we have a good track record in doing (refer to our 1Q10 Macro Theme: Chinese Ox In A Box, where we were out front calling for similar policy-induced economic weakness that ultimately went on to characterize the last ~3yrs of the Chinese economy).

Darius Dale

Senior Analyst

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03/04/13 11:16 AM EST

Italy’s Grillo Talks Down The Euro

There was a lot of noise out of Italy this weekend on election developments; however there is no more certainty on the formation of a grand coalition versus the call for another election. Italy’s FTSE MIB equity index is bearish TRADE and TREND and is now down -13.1% since its YTD high on 1/29. Of note is that Beppe Grillo said that he wants an online referendum on Italy’s membership in the EUR. Make no mistake about the impact of social media and a former comedian (Grillo) can have on the EUR/USD.

Election Developments in Italy

It’s no clearer today whether there will be a formation of a grand coalition or the need for another round of elections. Here’s the update:

Neither Bersani nor Grillo are pushing for a coalition

Bersani insists he would form a new government on his own without seeking an alliance with his main rivals, Berlusconi and Grillo

Bersani issued an ultimatum to Grillo to support a temporary government

Grillo is repeatedly against a coalition but said his party might support a government if it changed the electoral law, cut politicians expenses and set a two-term limit for parliamentarians

Italian President Giorgio Napolitano is exploring the possibility of putting together a coalition between the center-left and center-right, but with neither Bersani nor Berlusconi as Prime Minister. Two names are under consideration are former center-left prime minister Giuliano Amato and Matteo Renzi, the reformist Democrat mayor of Florence

Berlusconi says he is in favor of going down this routeonly if the center-left agrees to support his yet to be named candidate to succeed Napolitano as president after his seven-year term ends on May 15th

Napolitano has been adamant that he wants to avoid an immediate vote

Our critical level for the FTSE MIB is TREND line resistance of 16,449. The index is broken on both its immediate term TRADE and intermediate term TREND levels.

On Grillo’s EUR Talk

Grillo said that he wants an online referendum on Italy’s membership in the EUR. While such a vote would not be legally binding in Italy, it could carry a lot of political weight given the power of social media. We think the call should influence the EUR/USD to the downside.

Our critical quantitative lines on the EUR/USD are outline in the chart below:

The spread on the Italian 10 year yield and German bunds shows no abatement in the steady rise. Given the runway of political uncertainty we expect this spread to continue its move higher over the coming weeks.

Matthew Hedrick

Senior Analyst

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